LONDON: British gilt futures reached the highest closing level in nearly four weeks on Monday, as investors braced for almost 40 billion pounds of redemption and coupon payments.
Analysts said that investors were also gearing up for a second round of cheap three-year loans from the European Central Bank later this week, while a weak performance by European equity markets was also boosting demand for fixed-income assets.
"There's a lot of money knocking around in the gilt market this week, and some reasonable index extensions that have to be matched," said Moyeen Islam, strategist at Barclays Capital.
The March gilt future settled 49 ticks higher at 116.79, the highest closing level since Jan. 31.
German Bund futures settled 71 ticks up at 139.74, the highest closing level in almost six weeks - propelled, traders said, by German Chancellor Angela Merkel's comment that there was no 100 percent guarantee the second Greek bailout would succeed.
In the cash market, the yield on 10-year gilts was 5 basis points lower at 2.02 percent, keeping the spread against Bunds a fraction wider at 19 basis points.
The yield differential between 10-year gilts and their US counterparts has also been narrowing sharply in recent days and has tightened to just 9 basis points, holding close to recent lows.
The Debt Management Office will redeem the 5 percent gilt due 2012 on March 7, generating a payment to the market of 26.87 billion pounds. In addition, analysts estimate that coupon payments on existing gilts will total around 10 billion pounds.
On top of that, the Bank of England is buying 4.5 billion pounds of gilts this week as part of its quantitative easing programme, dwarfing the DMO's auction of 2.75 billion pounds of 10-year gilts on Thursday.
Redemptions and coupon payments tend to lengthen the duration of gilt indices, which are widely tracked by fund managers, and will therefore oblige them to purchase more longer-dated gilts to keep pace.
Vatsala Datta, a strategist at Lloyds Corporate Markets, said most of next week's coupon payments would be paid on seven- to 15-year bonds and were therefore likely to be reinvested in that sector as well.
Yields on gilts with a maturity of six years and above were down by around 5 basis points, outperforming shorter maturities, which were also suffering because of a high number of offers at the BoE's weekly buyback of this sector earlier on Monday.
Dovish comments from BoE policymakers have given a lift to gilts in recent sessions, after it emerged that two of the nine-member Monetary Policy Committee voted for a bigger injection of stimulus than the 50 billion pounds agreed last month.
BoE policymakers will be out in force this week to explain their votes, kicking off with BoE deputy governor Paul Tucker on Tuesday evening, while governor Mervyn King and other MPC members will take questions from a parliamentary committee on Wednesday.
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